CFPB Mortgage Rules Change Looms Large

By the time next year rolls around, Truity Credit Union in Bartlesville, Okla., will be ready to comply with new mortgage loan requirements from the Consumer Financial Protection Bureau. Thanks to policies and procedures already in place, the final adjustments won’t likely be traumatic for the credit union.

“We are well-positioned and well-prepared for the changes coming down, but we’ve spent a lot of time getting to that point,” said Mark Wilburn, chief lending officer for Truity, which was known as 66 Federal Credit Union until early August. “We exercised our own good judgment, as did most credit unions, and weren’t very far out on a limb, anyway.”

With $675 million in assets and 55,000 members, Truity has adequate resources to do its mortgage loan processing in-house. The credit union’s self-sufficiency has allowed it to strengthen policies and procedures as the financial regulatory climate escalated over the years, he said, and Truity has resources to adapt to the remaining changes needing to be made. However, smaller credit unions without the internal resources may not find things so easy.

“I imagine that smaller credit unions are doing things differently,” Wilburn said. “What’s important for them is to make sure that whoever their third-party partner in this process may be is on top of all this.”

The CFPB’s mortgage rules finalized in 2012, with a compliance due date of Jan. 10, 2014, have already set forth six new guidelines for mortgage lenders under its direction from the Dodd-Frank Act. With everything from qualified mortgage guidelines to directions on loan originator compensation and ECOA appraisals to mortgage servicing rules, the entire mortgage lending landscape will experience a sea change in the direction of more stringent requirements.

A seventh guideline governing closed-end mortgages, expected in October, will add even greater burden to a situation some lenders already find daunting. Although many credit unions have been exercising the necessary prudence all along, the need to document and verify those procedures will make the process cumbersome, as well as more costly, according to Jon Bundy, regulatory compliance manager for CUNA Mutual Group in Madison, Wis.

“The effect of the regulations is that they will cause all credit unions to reaffirm exactly what their mortgage goals are,” said Bundy. He added that the estimated 3,500 pages of new laws are all subject to updates and tweaks, which pose significant challenges for most if not all credit unions.

“There is a lot to wade through, and it can be either a blessing or a curse depending on how it affects the industry,” he said.

At $1.4 billion TruMark Financial Credit Union in Trevose, Penn., a long-time focus on mortgage lending has already set the institution’s mortgage operations on the right course, according to Tim Rawlinson, TruMark’s vice president of mortgage lending. Slower processing time to accommodate the variety of increased checkpoints is one drawback of the new requirements, but he said it’s not enough to compromise the credit union’s overall processes and procedures.

“The regulatory spirit is to provide full disclosure, but we go a step beyond that in the spirit of doing the right thing across the board,” said Rawlinson in support of the new regulations, which Dodd-Frank mandated to curb the banking excesses that led to the Great Recession. “A lot of the bad players have exited the market, and the new regs allow good lenders to make sound loans so we don’t experience those types of things again.”

Compliance is a key factor in managing successful transitions, and both Truity and TruMark have compliance officers who are cautiously optimistic—and maybe a little anxious—about the January deadline.

“There are definitely challenges in the compliance process,” said Cheryl Hart, TruMark’s compliance officer. “I have a network of other compliance people I consult with, as well as the Pennsylvania Credit Union Association and CUNA. The CFPB itself has plethora of documentation to help compliance officers.”

Vickie Black, Truity’s compliance officer, said she agrees and cited several areas that will offer her credit union challenges.

“The qualified mortgage rule and ability to repay are the more important ones we will have to manage,” Black said. “There’s an appraisal rule out there, but we’ve provided a copies of appraisals to our members for 20 years.”

Next Page: Automated Needs

A key issue both credit unions mentioned was the need to automate mortgage loan processes in order to comply with the new standards while maintaining high service levels. In the case of smaller institutions, vendor support will be critical to complying with the January deadline, said Kelly Graham, president and CEO of FICS, a mortgage loan origination and servicing software provider based in Addison, Texas.

FCIS had already started making changes to its Mortgage Servicer system last year to assist users in complying with the CFPB mandates, she said. Unfortunately, continued regulatory adjustments like rule changes the CFPB made in July compromise vendors’ abilities to help their clients comply with the deadline.

“Any time there are additions or modifications to regulatory rules, we go through the same process of research, review, programming and testing,” Graham said, “which makes it difficult, especially in the current climate where we are inundated with regulatory changes that impact both our servicing and origination software systems.”

Despite the challenges, FCIS already has tools built within its system to help its credit union client be compliant with the rules, Graham said.

Bundy said the NCUA’s third-party due diligence efforts to make sure some vendors are ready for the Jan. 10 deadline has helped bring all vendors in line with requirements, because the regulator will know who’s at fault if credit unions aren’t in compliance. Smaller credit unions also may lean on origination systems provided by Fannie Mae and Freddie Mac to meet their compliance requirements, he added.

The new rules, designed to protect consumers, may have unintended negative consequences. Although constituting just a small portion of its portfolio, TruMark has ceased offering 40-year mortgages because the new rules don’t accommodate them, said CFO Vincent Market.

Increased compliance requirements also may raise other issues.

“The rules do increase the complexity level of having a mortgage program, which raises the bar to entry for those credit unions thinking of adding a mortgage program,” Bundy said. “But I don’t know if that’s truly preventing credit unions from getting into mortgage programs or spurring mergers with larger institutions.”

The credit union executives said they agree that complying with the new regulations will make it more difficult and expensive for members to get a mortgage loan. Chances are, with rare exceptions, those expenses will ultimately be passed on to the member, they said. More compliance means more checkpoints for the credit union and more documentation required from the borrower, both of which could add expense.

“At some level it will be more expensive to get a loan,” Wilburn said. ”But we can’t quantify that today in additional costs that may get passed on to the borrower.”

Market said he also sees a somewhat ambiguous outcome from the new regulations. The question of whether the regulations designed to protect consumers’ interests will truly be perceived as a benefit has not been answered, he said.

“How are members going to react on Jan. 10?” Market said. “Will they care? Is the process more challenging for them? Will the new regs drive people away? I really don’t know.”